Inflation has dropped to zero for the first time on record, putting the UK on the brink of falling prices.

The cost of goods and services has been driven down in recent months thanks to falling oil prices, which leads to lower prices at the pump, and a supermarket price war, which has seen the cost of groceries fall.

In a boost to household budgets, the fall to zero means prices are no higher than they were this time last year.

Inflation, measured by the Consumer Price Index (CPI) could fall further in the coming months and could even turn negative before the year is out before starting to rise again. Should it turn negative, it will be the first time in half a century that Britain has experienced deflation.

Boost: Inflation is at record lows thanks in part to falling grocery prices

The low rate provides a lift to household incomes as the price of items remains unchanged while incomes start to rise. The effect is many will start to feel for the first time in years that their money goes just that little bit further.

The surprise scale of February's fall is likely to push back the expected timing of an interest rates hike, currently pencilled in for 2016.

It increases the likelihood that interest rates could even be cut further before they start to rise again.

Food and non-alcoholic beverages saw the greatest drop in prices - they are 3.3 per cent cheaper on average than just a year ago.

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Staples such as milk, cheese, eggs, bread, jam and chocolate have seen particularly large price drops as supermarkets lure in shoppers with the promise of low-cost everyday items.

Petrol prices also saw a record decline of 16.6 per cent. A litre of petrol cost 107p last month, down from 198.3p in January and 129p in February last year.

The cost of laptops, tablets, printers, books, games and toys also fell.

Chief secretary to the Treasury Danny Alexander said: 'Today's zero inflation is the right sort of price freeze, with low oil prices feeding through to prices.

Drop to zero: Inflation has been on a downward trajectory and has now hit zero per cent

'It's yet another month that sees earnings pulling ahead of prices, which will be a great help to millions of families.'

Chancellor of the Exchequer George Osborne said on Twitter: 'Inflation at zero is a first for the British economy. Low inflation due to falling oil prices is good news for family budgets.

'Prices are frozen and, as the recovery from Labour's Great Recession strengthens, their economic argument has literally come to nought.'

Prime Minister David Cameron tweeted: 'Inflation is running at 0 per cent - the lowest on record. It's good news for family budgets and a sign our long-term plan is working.'

The Bank of England Governor Mark Carney has spoken in the past about the boost to households of a period of low or zero inflation.

He has also sought to reassure that it is likely low inflation will only be temporary as the main causes will 'drop out' of the inflation rate within a year: neither oil nor grocery prices are likely to continue to fall indefinitely.

However he has warned that we need to guard against the 'clear and present danger' that a longer period of negative inflation would create.

One consequence tends to be that households and businesses put off making purchases or investment decisions because they believe prices will continue to fall.

However in a speech earlier last month he said there was little evidence of this effect of 'delayed gratification' so far.

Maike Currie, associate investment director, Fidelity Personal Investing, added today that: 'It is also worth noting that both food and fuel are essential items - no one is going to delay their weekly shop or avoid filling up their car's petrol tank in case prices continue to fall.'

However she warned that worryingly even once the falling oil and supermarket prices are stripped out of the inflation figure, inflation is still falling overall.

'Strip these (somewhat exceptional) factors away and core inflation – a measure of inflation that excludes transport and food - has also fallen to 1.2 per cent in February, from 1.4 per cent in January, and 1.3 per cent in December,' she said. 'The fall in core inflation is worrying and raises question marks over whether the UK is suffering from unhealthy deflation or welcome disinflation, which lines the pockets of consumers and boosts the economy.'

Unlike in the eurozone, where prices are already showing year-on-year falls, most economists think British consumer demand will remain firm in the face of falling prices, due to robust employment growth and signs of a pick-up in wages.

Another consequence of deflation is that household debts start to become more expensive. This is because debt is generally measured in actual cash terms and is not adjusted for inflation. Therefore if the value of money continues to rise, so does the size of household debts such as mortgages.

Record low inflation will boost the Chancellor's claim that households are beginning to see real incomes rise

Carney added earlier this month that if factors weighing down inflation such as the strength of the pound were to increase, the path of interest rates may need to change – hinting that they could rise more slowly or even be cut.

Bank of England chief economist Andy Haldane said last week that rates were as likely to fall as to rise. Today's figures will only increase the possibility of a rates cut.

Ben Brettell, senior economist at stockbrokers Hargreaves Lansdown, said: 'I believe a cut in interest rates looks most unlikely but, with inflation at zero and deflation looming, it is almost impossible to see them rising either.

'It therefore appears interest rates will be stuck at 0.5% for some time yet - I don't see them rising until mid-2016 at the very earliest.'

Rates have been held at a rock-bottom 0.5 per cent for the last six years. The low base rate means the cost of mortgage borrowing and servicing other household debts is at record lows.

As a result household borrowing is rising at its fastest pace for a decade, a study from PwC revealed earlier this week. At this pace, the average level of unsecured debt per UK household will hit £10,000 by next year, it said.

The ups and downs: The cost of food, transport and recreation in particular have fallen over the past year

While households are largely managing to stay on top of their loans at the moment thanks to low unemployment, rising wages and low rates, millions could start to struggle as rates start to rise, the report warned.

Should interest rates stay low it will also put further downward pressure on the pound, which is trading close to near-five year lows against the US dollar.

Investors put off piling into sterling while returns as a result of low interest rates remain so low. However conversely the prospect of interest rates being lower for longer has buoyed stock markets, helping the FTSE 100 to surpass 7,000 points for the first time ever last week.

Sterling fell to a one-month trough against the euro and a day's low against the dollar on Tuesday, after the inflation data was released. Sterling hit a low of $1.4917, having traded at around $1.4945 beforehand. It also fell against the euro, with the single currency rising 0.4 percent to 73.63p, its highest since February 23.

After opening lower, the FTSE 100 index bounced higher after the inflation data, hitting a new all-time peak at 7,050.45, before settling back – up 2.6 points at 7.040.22 - as traders worried slightly about the implications of the fall towards deflation for the UK economic recovery.

CPI inflation has never been as low as its latest reading since records by the Office for National Statistics began in 1989. According to an experimental model created by the ONS last year, CPI would have last been lower, at minus 0.6 per cent, in March 1960.

Retail Prices Index (RPI) inflation, a separate measure which includes housing costs, fell to one per cent from one per cent in January.